Guide to South Korean Won (KRW)

Introduction

The South Korean Won (KRW) is the official currency of South Korea, managed by the Bank of Korea (BOK). As the fourth-largest economy in Asia and a major global exporter, South Korea's currency plays a critical role in international trade and investment. The KRW is a partially convertible currency, with capital controls in place to mitigate excessive volatility. The Bank of Korea actively intervenes in the FX market to maintain stability, particularly during periods of heightened market uncertainty.

A road sign pointing towards Seoul against a backdrop of a wooded hillside.

Foreign Exchange (FX) Framework 

South Korea operates under a managed floating exchange rate regime. The exchange rate of the KRW is determined by market forces, but the BOK intervenes as necessary to prevent excessive fluctuations. Key characteristics of the FX framework include:

• Partial Convertibility: The KRW is freely tradable for current account transactions, but capital account transactions are subject to regulatory oversight.

• Central Bank Oversight: The BOK closely monitors KRW fluctuations and engages in FX interventions to stabilize the currency.

• FX Trading Regulations: Non-resident financial institutions can engage in FX transactions under specified conditions, and foreign exchange trading hours have recently been extended to improve market accessibility.

• Capital Controls: South Korea maintains some restrictions on capital flows, particularly short-term foreign borrowings, to protect financial stability.

• Monetary Policy Announcements: The BOK announces policy updates typically eight times per year, with interventions as needed in response to external market conditions.

For more details, visit: https://www.bok.or.kr/eng/bbs/E0000634/list.do

Product Availability 

A wide range of FX instruments is available for hedging and investment in the South Korean market:

• Spot FX: Highly liquid market for immediate settlement of KRW transactions.

• Forwards & Swaps: Onshore deliverable forwards are commonly used for hedging trade and financial exposures.

• FX Options: Available on major trading platforms, providing risk management tools for corporate hedging.

• Cross-Currency Swaps (CCS): Used for managing exposure to KRW interest rate and FX risk.

• Interest Rate Swaps (IRS): Facilitates hedging of local currency-denominated fixed income exposure.

• Bond Market: South Korea’s sovereign and corporate bond markets are well-developed, with increasing foreign participation following the inclusion of Korean bonds in global bond indices.

Repatriation Guidance 

South Korea maintains structured guidelines for capital inflows and repatriation:

• Trade-Related Transactions: KRW settlements for cross-border trade are permitted with minimal restrictions, allowing businesses to conduct import and export transactions without significant regulatory hurdles.

• Capital Account Transactions: Foreign investors can freely repatriate dividends and earnings, subject to reporting requirements. South Korea has streamlined procedures for foreign companies to move funds offshore while ensuring compliance with financial regulations.

• Investment Repatriation: Non-resident investors can repatriate capital gains and interest from investments in the Korean bond and equity markets. However, large transactions may require prior notification to the BOK to prevent market disruptions.

• Foreign Borrowing and Loan Repayments: Companies and financial institutions borrowing from overseas lenders must comply with reporting and approval requirements, particularly for short-term borrowings exceeding specified thresholds.

• Regulatory Considerations: Large fund transfers and short-term foreign borrowings may be subject to oversight to prevent excessive currency volatility. Authorities may impose additional reporting or review measures for high-value transactions to maintain financial stability.

Risk Management Strategies 

Managing KRW exposure effectively requires structured risk management strategies:

• Hedging with Forwards & Options: Corporates can hedge FX risk using forward contracts and structured FX options.

• Monitoring KRW Volatility: Keeping track of market-moving events, such as trade tensions and monetary policy shifts, helps businesses anticipate currency fluctuations.

• Liquidity Management: Ensuring access to onshore and offshore KRW liquidity is critical, particularly during market stress periods.

• Tracking Policy Announcements: The BOK's interventions and regulatory adjustments significantly impact the KRW’s valuation and market liquidity.

Key Regulatory Updates 

The South Korean government frequently adjusts FX policies to align with global financial trends:

• Extended FX Trading Hours: As of July 2024, FX trading hours have been extended to increase foreign participation and liquidity.

• Inclusion in Global Bond Indices: South Korean bonds were included in the FTSE Russell World Government Bond Index (WGBI), attracting greater foreign investment.

• Relaxed FX Regulations: In December 2024, authorities announced measures to ease FX restrictions, including expanded foreign currency borrowing limits.

• Market Stabilization Measures: The government has pledged intervention mechanisms to mitigate excessive volatility in the KRW.

Conclusion 

The South Korean Won remains a critical currency in the global economy, balancing a managed float with strategic interventions by the BOK. Understanding its FX framework, product availability, and regulatory landscape enables businesses and investors to navigate KRW-related transactions effectively. Staying informed about policy updates and market trends ensures efficient risk management in South Korea’s evolving financial environment.